It is illegal for any two firms that sell similar products to engage in price-fixing agreements. Violating the anti-trust laws can bring both civil and criminal prosecutions. Nevertheless, price-fixing does take place. Examples would be found at the service plazas along the NY State Thruway and the NJ Turnpike. Each location has a small number of fast-food restaurants. Each fast food restaurant belongs to a different firm, which should create competition, yet at service plazas, all have uncommonly high prices. Draw a prisoner’s dilemma type of game (2x2) to show the pricing choices and strategies of two competing fast-food restaurants, located at one service plaza. Payoffs are daily profits. Create sensible numbers. Write a brief explanation for the different numbers that you have created. Identify John Nash’s equilibrium, as well as the optimal outcome for the two fast-food outlets. Also, find and label any strictly dominant strategies. Actual long-run pricing results at the service plaza may be contrary to the results predicted by the 2x2 diagram from part A. Explain why actual results may differ in the long run. Why is the competition between different firms unable to bring lower prices to the consumer at the service plaza?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter13: best-practice Tactics: Game Theory

Section: Chapter Questions

Problem 1E

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It is illegal for any two firms that sell similar products to engage in price-fixing agreements. Violating the anti-trust laws can bring both civil and criminal prosecutions. Nevertheless, price-fixing does take place. Examples would be found at the service plazas along the NY State Thruway and the NJ Turnpike. Each location has a small number of fast-food restaurants. Each fast food restaurant belongs to a different firm, which should create competition, yet at service plazas, all have uncommonly high prices.

Draw a prisoner’s dilemma type of game (2x2) to show the pricing choices and strategies of two competing fast-food restaurants, located at one service plaza. Payoffs are daily profits. Create sensible numbers. Write a brief explanation for the different numbers that you have created.
Identify John Nash’s equilibrium, as well as the optimal outcome for the two fast-food outlets. Also, find and label any strictly dominant strategies.
Actual long-run pricing results at the service plaza may be contrary to the results predicted by the 2x2 diagram from part A. Explain why actual results may differ in the long run. Why is the competition between different firms unable to bring lower prices to the consumer at the service plaza?

answer all of them, please.

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